Month: March 2024

The growth of agricultural output matters. About 700 million people in the world live below a poverty line of consuming $2.15 per day, and if that poverty line is raised to $3.85 per day, more than 2 billion people are below it. Raising the standard of living for the very poor requires higher agricultural output. Greater productivity in global agriculture matters as well. In most low-income countries, half or even three-quarters of worker are still in agriculture, and part of economic development is that rising agricultural productivity helps fuel a migration of those workers to higher-paying jobs in other sectors. Even in a high-income context, it’s worth remembering that agriculture isn’t just about food, but that there are a large and growing number of bio-based consumer and industrial products that aren’t eaten.

Thus, it’s big news that the growth rate of agricultural output and agricultural productivity is slowing down. The US Department of Agriculture keeps the statistics, which Keith Fuglie, Stephen Morgan, and Jeremy Jelliffe use to generate this graph in “World Agricultural Output and Productivity Growth Have Slowed” (USDA Amber Waves website, December 7, 2023)

The black line at the top shows annual growth for global agricultural output. Of course, these annual rates compound over time. Over a decade, a drop 0.8% per year (what happens from the 2001-2010 period to the 2011-2021 period) means that total agricultural output will be more than 8% lower than it would otherwise have been.

The bars then break down that total growth into possible causes. Land expansion, irrigation intensification and input expansion (like machinery, labor, fertilizers, and pesticides) are measurable. The common approach is that whatever can’t be accounted for by measurable factors is called “productivity growth”–which becomes a nebulous category that includes everything from improved cultivation methods to better seeds. As you can see, essentially all of output growth that is lower by 0.8% per year reflects lower productivity growth.

The issues of low-income people and economies with half or more of the workers in agriculture are especially salient in economies across Africa. For an overview of the issues in improving technology there, see Tavneet Suri and Christopher Udry. 2022. “Agricultural Technology in Africa.” Journal of Economic Perspectives, 36 (1): 33-56. They emphasize the problem of enormous heterogeneity across the agricultural sector in countries of Africa, which has made it harder to discover and diffuse new agricultural technologies.

The primary argument for a government-provided basic income is that it will make those with low incomes better off, by increasing their financial resources and by allowing them to negotiate for better jobs. But the extent to which this conclusion holds true will depend on individual circumstances of the recipient, and what other adjustments happen in response to a basic income. For example, what happens if a basic income is counted as “income” and eligibility for other public support is correspondingly reduced? What happens if firms, recognizing that lower-income workers have an alternative source of support, look for ways to impose charges on employees (say, for training or for uniforms)? For that matter, what if owners of rental housing see a universal basic income as an opportunity to raise the rent? Of course, these kinds of counterreactions in government policy and markets are not what advocates of a universal basic income desire–but that doesn’t mean they won’t happen.

David A. Green delivered the Presidential Address to the Canadian Economic Association on the topic: “Basic income and the labour market: Labour supply, precarious work and technological change” (Canadian Journal of Economics, November 2023, pp. 1195-1220).

Green focuses in particular on potential interactions between a universal basic income and labor markets, and on how economic models which define work as a negative and leisure as a positive can miss important aspects of the debate. Green writes:

In our main models, people value leisure and would always prefer a life of living on benefits without work (if their earnings options place them near the benefit level of income). Supporting such a life for the least productive people in society is considered a policy success in a system in which walls are built to prevent others from joining them. My sense from the discussions with people who might actually need the benefits is that a more accurate model would be one in which people have a basic desire for working (for reasons of self-respect, feelings of self-efficacy and social connection) but would also, in any moment, prefer more leisure. … At the same time, many of the people who are in need of support face multiple barriers to work (health issues, poor work records, insufficient housing, etc.) that mean they face low paying, short duration jobs. That is, we should not think in terms of models in which they can be moved into permanent working states but ones in which they will repeatedly find themselves in need of support mixed with jobs they take in their search for self-respect and connection. The obvious trade-off is that we would want to create a system that provides support in this sporadic work pattern without creating incentives to take up sporadic work patterns for people who might not otherwise face them. I do not know of any papers that take this perspective when thinking about designing transfer policies. …

Returning to the main theme of this paper, a perspective that places more emphasis on supporting self-respect and social respect and their relationship to work has implications for how we think about a basic income. On the one hand, a basic income does well under this perspective. At the very least, it implies providing benefits without the judgement associated with work requirements. In that sense, it is closer to the recommendations of optimal tax theory. On the other hand, it does not pay enough direct attention to the relationship between respect and work. People could (and might) use a basic income as monetary support for their desire to find work and get training. But this is left entirely up to them. Surely, a system that provides direct supports would be more effective.

Here is Green’s argument as to whether a basic income is likely to be a useful tool for reducing the number of “bad jobs” and increasing the number of “just labour exchanges” by giving workers the freedom to leave a job and look for alternatives:

I think the answer is no for two reasons. The first is an ethical argument. If a key problem with bad jobs is that they damage workers’ self-respect and rob them of autonomy then a cash payment is not the correct response. A key tenant of justice is that the remedy should operate in the same realm as the problem. Paying someone cash to compensate them for an insult may, for example, heighten the feeling of being insulted rather than remedy the problem. The right realm would be to alter the work arrangements to remove the direct insult to dignity. I think this is a key problem with economic models when thinking about the justice of worker–firm relationships because we write our models in terms of individual utility and, ultimately, monetary equivalents, thus taking us away from a consideration of different realms of exchange. Put another way, when we broaden our lens to consider outcomes in terms of justice then we are led to consider jobs as locations of self-respect and self-image rather than simply as vehicles of increased income and reduced leisure. In that context, it becomes harder to think about reducing everything to monetary equivalents.

The second reason is that our models miss the nature of the problem at hand. Changing workplace conditions in a situation in which individuals do not freely move among jobs requires the workers to act collectively. Indeed, I believe that an accurate model of the creation of workplace amenities is one that involves both the employer and the set of employees, with a critical mass of the latter needing to act in order for changes to occur. Put another way, the set of employees at a workplace is a community and, in fact, is a key community for a person’s notions of self-respect. One individual in that community deciding to walk away from the job because she does not like the level of amenities will not be sufficient to alter the work conditions because frictions in the labour market prevent market discipline of the kind that happens in a simple neoclassical model. Using a basic income as a response in this situation involves hoping that each of the individuals takes their personal backstop as a means to engage in a community action. This might happen but there is no clear reason why it would. Maybe it would allow them all to walk away from a bad job but, as we have seen, it is not clearly the case that this will lead to a reduction in the proportion of bad jobs because it funds walking away from good jobs (in the hopes of finding an even better job) as well.

A problem with a basic income as a response to an over-abundance of bad jobs is that it ignores both of these issues. It acts as if money is the right realm and that backstopping individual effort is sufficient to correct the problem. But that would be true only in a neoclassical world and in that world, we are either in a compensating differential equilibrium—in which case no response is actually needed—or the more directly effective response is regulation not cash. In a world where individual workers do not have sufficient agency through the market to bring about change, a basic income is not the right response.

To put this another way, at least some advocates of a basic income have, in an indirect way, considerable faith in the operation of a free-market labor system. They believe that with a universal basic income, the decentralized negotiations between workers and employers, along with movement between jobs, will provide an improved incentive for employers to offer better jobs. On the other side, Green argues that better jobs are unlikely to result from the market-oriented dynamic: instead, he argues that better jobs are the result of collective action between workers who are staying on the job and their employers, as well as from regulation and government programs tied to issues like assistance with training, child care, and transportation costs.

There been a controversy in recent decades about the independence of central banks from the rest of the government. The ongoing concern–especially have high inflation rates rocked the US and other countries around the world in the 1970s and 1980s–was that governments have a bias toward inflation. Politicians want the central bank to help finance their spending; conversely, politicians will often oppose anything that might slow the economy, like higher interest rates. However, if the central bank can be given a clear goal, like a low rate of inflation, then it can push back against the inflationary biases of the rest of the government.

Thus, many central banks around the world, like the European Central Bank, have a clear-cut target for low inflation as their only policy goal. The US Federal Reserve has a “dual mandate,” to keep inflation low but also to fight recession. But central banks are often expected to deal with other tasks as well, like dealing with financial crashes and participating in bank and financial regulation.

Here, I won’t try to resolve these disputes, but instead will simply point out the long-term pattern: the arguments for greater central bank independence seem to be prevailing. David Romelli discusses “Trends in central bank independence: a de-jure perspective” (BAFFI CAREFIN Centre Research Paper N. 217, February 2024; for a readable short overview, https://cepr.org/voxeu/columns/recent-trends-central-bank-independence).

Basically, Romelli collects records of legal changes across 42 categories that reflect more or less central bank independence. I’ll provide the full list of categories below, but they can be grouped into categories like how the governor and board of the central bank are chosen and the rules of governance; how monetary policy is set; whether the central bank has specific statutory goals; limitations on the central bank loaning directly to the government; whether the central bank is financially independent; and rules governing reporting and disclosure for the central bank.

Taking these together, the basic theme is that central bank independence doesn’t change much up until about 1990, when there is a dramatic shift upward. The shift occurs across countries at all levels of economic development: high-income, middle-income, low-income. The momentum toward greater central bank independence stalls for a few years after the 2007-09 global financial crisis, when legislators and central banks were understandably focused on other topics, but has resumed since then.

Romelli writes:

This paper presents an extensive update to the Central Bank Independence – Extended (CBIE) index, originally developed in Romelli (2022), extending its coverage for 155 countries from 1923 to 2023. The update reveals a continued global trend towards enhancing central bank independence, which holds across countries’ income levels and indices of central bank independence. Despite the challenges which followed the 2008 Global financial crisis and the recent re-emergence of political scrutiny on central banks following the COVID-19 pandemic, this paper finds no halt in the momentum of central bank reforms. I document a total of 370 reforms in central bank design from 1923 to 2023 and provide evidence of a resurgence in the commitment to central bank independence since 2016. These findings suggest that the slowdown in reforms witnessed post-2008 was a temporary phase, and that, despite increasing political pressures on central banks, central bank independence is still considered a cornerstone for effective economic policy-making.

Here’s the list of 42 characteristics affecting central bank independence in Romelli’s index:

It seems plausible that being poor will have psychological effects. It seems at least possible that some of these psychological effects could, in turn, make it harder to escape poverty. Johannes Haushofer and Daniel Salicath explore the evidence on these and related issues in “The psychology of poverty: Where do we stand?” ( Social Philosophy and Policy, 2024, 40:1, 150-184; a pre-print draft is also available as NBER Working Paper 31977). The paper is part of a 12-paper symposium in this issue on topics of “Poverty, Agency, and Development.”

The evidence that lower-income people feel better-off when given money is pretty clear. The harder question is whether poverty has particular psychological effects that affect decision-making in a way that may cause one to remain in poverty. This thesis was put forward with force and clarity in a 2013 book by Sendil Mullainathan and Eldar Shafir, Scarcity: Why Having Too Little Means So Much. I wrote about this line of argument here at the Conversable Economist about a decade ago, mentioning work at the time by Haushofer and Mullainathan and Shafir, and also quoting some passages from George Orwell’s 1937 book, The Road to Wigan Pier, in which he describe (with frustration and empathy) how many poor and working-class people have become accustomed to living on a a “fish and chips” standard that combines unhealthy food, cheap luxuries, gambling, and electronic entertainment (in his day, the radio), in a way that helps to offset their limited economic prospects.

In the more recent essay, Haushofer and Salicath describe the earlier hypothesis by Mullainathan and Shafir in this way:

The authors posit that poverty consumes cognitive resources, including attention, executive control, and working memory, thereby impairing decision-making. Specifically, they suggest that scarcity both reduces overall mental bandwidth and redirects attention toward salient, income-relevant features of a decision problem at the expense of less salient but potentially important other aspects. Two landmark studies accompanied publication of the book. Anuj Shah, Mullainathan, and Shafir showed in a series of lab experiments that participants experiencing scarcity in terms of their experimental “budgets” (of points or time) tended to “over-borrow” from their experimental budgets. Anandi Mani and coauthors primed low- and high-income participants in a mall in New Jersey with financial scenarios and reported reduced executive control and fluid intelligence when low-income participants thought about difficult financial problems. They also report lower performance on similar tasks among sugarcane farmers in India before the harvest (when resources are scarce) relative to after the harvest.

Haushofer and Salicath review a wide range of literature since then on how poverty or negative shocks to income affect psychological behaviors especially relevant to economic outcomes like cognitive functioning, short time horizons, trust, or excessive risk-taking. The evidence comes from a wide array of contexts: real-world evidence from shocks related to harvests for farmers in low-income countries; laboratory experiments where people work through structured games and scenarios in a classroom; natural settings where people experience greater or lesser stress on incomes and finances; and others. Alternative, there are studies that try to affect the aspirations of poor people (many of these studies are in low-income countries), sometimes by showing videos or presenting seminars that emphasize the possibilities for work and achievement, as well as by treating mental health issues more directly.

The authors summarize the evidence this way:

There has been significant progress in recent years, in particular, in establishing causality in the effect of income on psychological well-being; elucidating the precise functional form of psychological well-being with respect to income (satiation); and improving our understanding of the importance of relative income. Most saliently, the causal effect of income on psychological well-being is now robustly established. Research on the effects of scarcity and stress on economic decision-making has also made great strides in the past few years. However, the picture that emerges from these literatures is not as clear; individual studies are often statistically weak, provide conflicting evidence, and replication efforts have not always been successful. While the last word has perhaps not been spoken, in our view, the case for a poverty trap that operates through the effects of poverty on stress, decision-making, and cognition is currently not strong.

Alan Blinder delivered the 2023 Daniel Patrick Moynihan Lecture in Social Science and Public Policy to the American Academy of Political and Social Science last October on the topic “Economics and Politics: On Narrowing the Gap” (October 25, 2023; for text, see the Peterson Institute for International Economics website at https://www.piie.com/commentary/speeches-papers/economics-and-politics-narrowing-gap; to watch the presentation and accompanying discussion on YouTube, see https://www.youtube.com/watch?v=jaF4Cjundy4). Here are some of the nuggets that caught my eye.

On the extent to which much economists influence politics

May I start by dispelling a myth? Perhaps because economists are frequently trotted out to support or oppose policies, perhaps because we have a Council of Economic Advisers right in the White House, perhaps because the powerful Federal Reserve—so ably represented here today–is dominated by economic thinking, many people believe that economists have enormous influence on public policy. In truth, apart from monetary policy, we don’t. Almost a half century ago, George Stigler (1976, p. 351), later a Nobel prize winner, wrote that “economists exert a minor and scarcely detectable influence on the societies in which they live.” Stigler was no doubt exaggerating to make his point. But he had a point. And things have not changed much since.

On the time horizons of politicians

It is a commonplace that politicians have excruciatingly short time horizons. It is often said that they can’t see past the next election, but the truth is far worse. The political pros who advise politicians often can’t see past the next public opinion poll, maybe not even past the next tweet. Their natural time horizon extends only until that evening’s news broadcasts, if that long.

Advice to economists who want to participate in policy debates

Let me now turn to the minority of economists who wish to get engaged in policy. I have two suggestions to offer here … Both suggestions cut deeply against the grain. They are not what we teach in graduate school. …

I have just emphasized that political time horizons are too short for sound economic policy. But it’s also true that economists’ time horizons are too long for politics. Specifically, we economists typically focus on the “equilibrium” or “steady state” effects of a policy change. For example: What will happen eventually after a change in the tax code or a trade agreement? Don’t get me wrong. Those questions are important and highly pertinent to policymaking. We should not forget about them. But they are close to irrelevant in the political world because people don’t live in equilibrium states. Rather, they spend most of their lives in one transition or another. Yet economists often brush off “transition costs” as unimportant details. We shouldn’t. …

The process of adjustment to the superior free-trade equilibrium may be lengthy and painful, involving job losses, reduced incomes for some, decimated communities, and more. Economists know all this but don’t pay it sufficient heed. Politicians, by contrast, live in the real world of ever-present transition costs. They may not be in office long enough to enjoy the steady-state benefits. …

My second suggestion is that economists pay far more attention to issues of fairness rather than doting almost exclusively on efficiency, as we often do. In politics, perceived fairness almost always trumps efficiency—and politicians understand that. … Think, for example, about debates over the tax code, which are hardy perennials in Congress. Economists have a beautiful theory of optimal taxation, built around maximal efficiency. But that theory plays absolutely no role in congressional debates. Zero. Discussions of fairness, on the other hand, dominate the debates. And we get the tax mess that we do. …

So here’s my advice to economists interested in actual–as opposed to theoretical–policymaking. Don’t forget about efficiency. It matters. We are right about that. But we may have to content ourselves with nibbling around the edges, below the political headline level, to make the details of a complex policy package less inefficient. Call it the theory of the third or fourth best.